Government asks Canadians to weigh in on access to VC funding

In a new move to help bridge Canada’s widely-acknowledged funding gap for high-growth companies, the federal government has now launched a consultation on increasing access to venture capital and how it should allocate $400 million in funding to support the sector.

“Our Government recognizes the crucial role played by private sector risk capital in driving business growth and innovation,” Finance Minister Jim Flaherty said in a release. “These new resources will make it easier for entrepreneurs to access needed venture capital investments, helping high-growth firms develop and succeed.”

On June 22, Minister Flaherty announced the launch of a consultation on how to increase the availability of venture capital for high-growth businesses across the country.

Small and medium-sized enterprises (SMEs) have traditionally found it difficult to access Canadian venture capital to support their growth due to the size of the market. Low returns, declining trends in fundraising, and a lack of large institutional investors have also contributed to the problem.

In its consultation document, the government asks whether it has taken the right approach to fostering a positive investment climate, and whether a new direction should be taken.

In the past, the federal government’s actions to support the venture capital industry were mainly taken through Crown corporations, such as the Business Development Bank of Canada (BDC), and through indirect tax credit measures.

As part of this new direction, the government is asking stakeholders how it should allocate funds that have already been earmarked for the VC sector. In its 2012 Budget and Economic Action Plan, the federal government had announced that it would make available $400 million to increase private investments in early-stage risk capital, attract new investors, and support the creation of private large-scale VC funds.

“The Government is seeking to enhance the funding and expertise available for growth-oriented innovative firms while focusing resources on those that are most likely to become global leaders. The Government is now seeking views on how best to implement the delivery of the new resources,” reads the consultation’s discussion paper.

The government presents three scenarios in the discussion paper to adjust its public support measures: investing in funds with broad investment mandates; supporting specific sectors; and, supporting companies through certain stages of development, such as the seed and early stages.

The $400-million Budget measure to support the VC industry came after the release last fall of the Jenkins Panel Report on federal support to R&D. One of the report’s main recommendations was to increase access to risk capital for high-growth firms through public-led measures.

As part of the consultation, the government is also considering what regulatory changes it can make to assist businesses in gaining access to capital, noting that “it is important to consider ways to avoid placing unduly burdensome restrictions that will deter private sector investors.”

Discussion questions posed by the consultation include the following:

What key challenges do Canadian firms face in accessing capital?

What barriers do Canadian and international investors face in participating in the VC market?

How should the $400 million be allocated?

What is the ideal mix of large-scale and small-scale funds for Canada?

Should a portion of public support be directed to companies in a particular stage of development?

Stakeholders are invited to send their submissions to the consultation by July 27, 2012. Samuel L. Duboc, a partner at private equity firm EdgeStone Capital Partners, will act as a special advisor as part of the consultation.

Recognizing the importance of accessing private funding, The Funding Portal launched last month two new services, Financing-in-a-Box and Startup-in-a-box, to make it easier for Canadian firms to go through the legal hurdles required to close financing. In the coming month the Portal will also launch a database of all private support measures available to Canadian firms to complement its existing database of public funding and tax incentive programs.